COMMENT-EUR/USD may be drifting in the eye of an inflation storm

EUR/USD traded lower Monday but remains within the 1.0600-1.0700 zone it has been stuck in since the sharp fall from the April 9 high, and the U.S. PCE report on April 26 may be the catalyst to break the calm if it is well off the mark.

March core PCE is expected to match February's +0.3% month-on-month result but year-on-year is estimated to drop to 2.7% from 2.8% in February.

Recent U.S. price data has indicated the period of disinflation begun in February 2022 may have come to an end and that inflation could even be back on the rise, while Fed policymakers have been suggesting rate cuts may be delayed, leaving traders discounting only 40bps of easing this year.

The dollar's yield advantage over the euro has been increasing since late-February as German-U.S. yield spreads (US2DE2=RR) have been widening toward the base of their long term range.

An upside surprise from PCE would reinforce investors' growing expectations of delays to Fed rate cuts, increasing the dollar's yield advantage — with the potential to hit new wides in spreads — and triggering a resumption of the EUR/USD down trend to new lows.

The probability for a test of the critical 1.0450/1.0500 support zone would then likely increase.

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